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Article
Publication date: 7 October 2021

Moses Nzuki Nyangu, Freshia Wangari Waweru and Nyankomo Marwa

This paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.

Abstract

Purpose

This paper examines the sluggish adjustment of deposit interest rate categories with response to policy rate changes in a developing economy.

Design/methodology/approach

Symmetric and asymmetric error correction models (ECMs) are employed to test the pass-through effect and adjustment speed of deposit rates when above or below their equilibrium levels.

Findings

The findings reveal an incomplete pass-through effect in both the short run and long run while mixed results of symmetric and asymmetric adjustment speed across the different deposit rate categories are observed. Collusive pricing arrangement behavior is supported by deposit rate categories that adjust more rigidly upwards than downwards, while negative customer reaction behavior is supported by deposit rate categories that adjust more rigidly downwards than upwards.

Practical implications

Even though the findings indicate an aspect of increased responsiveness over the period, the sluggish adjustment of deposit rates imply that monetary policy is still ineffective and not uniform across the different deposit rate categories.

Originality/value

To the best of the authors' knowledge, this is the first study to empirically examine both symmetric and asymmetric adjustment behavior of deposit interest rate categories in Kenya. The findings are key to policy makers as they provide insights on how long it takes to adjust different deposit rate categories to monetary policy decisions. In addition, the behavior of deposit rates partly explains why interest rates capping was imposed in Kenya in 2016.

Details

International Journal of Emerging Markets, vol. 18 no. 9
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 3 June 2019

Siew Peng Lee and Mansor Isa

The purpose of this paper is to examine the extent to which conventional and Islamic bank fixed deposit rates can protect depositors against inflation in the Malaysia context.

Abstract

Purpose

The purpose of this paper is to examine the extent to which conventional and Islamic bank fixed deposit rates can protect depositors against inflation in the Malaysia context.

Design/methodology/approach

Nominal interest rates are represented by commercial bank fixed deposit and investment bank fixed deposit rates. The authors use monthly data over the period 2000–2016. The authors apply the autoregressive distributed lag bounds testing methodology to test the existence of long-run relationship between nominal rates and inflation, and the error-correction model to test for the short-run dynamics.

Findings

The results show that the nominal interest rate and inflation are cointegrated for all the data series. The evidence indicates that all the fixed deposit rates, for both conventional and Islamic banks are effective inflation hedges in the long-run thereby supporting the Fisher hypothesis. There is no difference in the inflation hedging ability between conventional bank rates and Islamic bank rates. However, the authors find no evidence of the short-run relationship between interest rates and inflation for either bank.

Practical implications

Bank regulators should be concerned on the similarities in behaviour towards inflation between conventional and Islamic rates, given that the deposit rates for both banks are supposedly set based on different premises. Bank customers, they should deposit their money for the long horizon in order to protect themselves against inflation. Depositors worrying about inflation should be indifferent between conventional or Islamic as both banks provide similar inflation hedging characteristics.

Originality/value

The novelty of this study is in using the bank fixed deposit rates to study the Fisher effect in an emerging market and in comparing the conventional and Islamic bank rates in terms of their inflation hedging ability.

Details

Journal of Economic and Administrative Sciences, vol. 35 no. 2
Type: Research Article
ISSN: 1026-4116

Keywords

Article
Publication date: 11 November 2014

Etem Hakan Ergec and Bengül Gülümser Kaytanci

This study aims to test whether the Islamic bank rate of returns are affected by the deposit rates of the interest-based bank in Turkey and whether they need to develop additional…

1133

Abstract

Purpose

This study aims to test whether the Islamic bank rate of returns are affected by the deposit rates of the interest-based bank in Turkey and whether they need to develop additional tools to manage it if they face an interest risk.

Design/methodology/approach

This study tests the causality between the Islamic bank rate of returns and the time deposit interest rates between 2002 and 2010 in Turkey by use of the Granger Causality method based on monthly data. The same analysis is repeated with respect to the terms before and after 2006.

Findings

It is concluded that for each term, the time deposit interest rates are the Granger cause of the Islamic bank rate of returns. This causality relation is more visible for the period after 2006.

Originality/value

The results shows that the Islamic banks are sensitive to the interest-based bank interest rates in Turkey. Therefore, this finding suggests that these banks need to remain cautious vis-à-vis the interest rate risk.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 7 no. 4
Type: Research Article
ISSN: 1753-8394

Keywords

Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

Article
Publication date: 29 January 2020

Siew-Peng Lee, Mansor Isa and Noor Azryani Auzairy

The purpose of this paper is to investigate the influence of the real interest rates, inflation and risk premium on the time deposit rates of banks in the dual banking system in…

Abstract

Purpose

The purpose of this paper is to investigate the influence of the real interest rates, inflation and risk premium on the time deposit rates of banks in the dual banking system in Malaysia.

Design/methodology/approach

The data consists of 1-, 6- and 12-month average time deposit rates of conventional and Islamic banks over the period of January 2000 to June 2017. The cointegration methodologies are used to explore links between the time deposit rates, real rates, inflation and risk premium. The causality tests to test causality linkages between pairs of variables are also applied. The generalised forecast error variance decomposition based on the error correction model is conducted to analyse the impact of variables variation on the deposit rates.

Findings

The results show the presence of two cointegration vectors in the deposit rates, real rates, inflation and risk premium, for both conventional and Islamic bank rates. Causality tests reveal that deposit rates are caused by inflation and risk premium in a one-way causality. The results of variance decomposition highlight the importance of inflation and risk premium in explaining the variations in the bank deposit rates. For the conventional bank, inflation shocks play the most important role in explaining the movements of the deposit rates. In Islamic banks, the major determinant’s largest influence is the risk premium. Between the two bank rates, Islamic bank rates receive more influence from the explanatory variables in the long-run compared to conventional bank rates. The real rates have no noticeable effect on the variance of time deposit rates for both banks.

Originality/value

This study presents new evidence on the relationship between time deposit rates and the three explanatory variables, which are the real interest rates, inflation and risk premium, for both conventional and Islamic banks in Malaysia. The dual banking system allows exploring the similarities and differences between conventional and Islamic banks in Malaysia in terms of the linkages between the variables.

Details

Journal of Islamic Accounting and Business Research, vol. 11 no. 5
Type: Research Article
ISSN: 1759-0817

Keywords

Open Access
Article
Publication date: 6 January 2021

Muhammad Mushafiq and Tayyebah Sehar

The purpose of this study is to find the empirical causal relationship between Islamic bank term deposit rates (IBTDR) and conventional bank term deposit rates (CBTDR) in the…

1487

Abstract

Purpose

The purpose of this study is to find the empirical causal relationship between Islamic bank term deposit rates (IBTDR) and conventional bank term deposit rates (CBTDR) in the short-term.

Design/methodology/approach

This study analyzes the short-term causal relationship between the term deposit rates (TDRs) for the time period of three years 2015 to 2018 on monthly data of IBTDR and CBTDR. Granger causality test, variance decomposition and impulse response function are applied to examine if there is any short-term causal relationship between the IBTDR and CBTDR.

Findings

This empirical study establishes that the IBTDR are dependent on the CBTDR in the short-term.

Practical implications

This research provides an insight for the customers of TDRs of the Islamic banking system. This study is not only a significant insight for the end-users but also for the regulators and researchers as it provides important empirical evidence. This could lead to further research on the reasons for causality.

Originality/value

There has not been any study of this nature in Pakistan to identify the causality of the two-TDRs. This research expands the dynamics of research in the context of the banking sector.

Details

Asian Journal of Economics and Banking, vol. 5 no. 1
Type: Research Article
ISSN: 2615-9821

Keywords

Article
Publication date: 18 October 2021

Syed Mehmood Raza Shah, Yan Lu, Qiang Fu, Muhammad Ishfaq and Ghulam Abbas

Shadow banking has been evolving rapidly in China, with banks actively using wealth management products (WMPs) to evade regulatory restrictions. These products are the largest…

Abstract

Purpose

Shadow banking has been evolving rapidly in China, with banks actively using wealth management products (WMPs) to evade regulatory restrictions. These products are the largest constituent of China's shadow banking sector. A large number of these products are off-balance-sheet and considered a substitute for bank deposits. China's banking sector, especially the small and medium-sized banks (SMBs), uses these products to avoid regulatory restrictions and sustainability risk in the deposit market.

Design/methodology/approach

This study empirically examined how banks in China, specifically SMBs, utilize these products on a short and long-run basis to manage and control their deposit levels. This study utilized a quarterly panel dataset from 2010 to 2019 for the top 30 Chinese banks, by first implementing a Panel ARDL-PMG model. For cross-sectional dependence, this study further executed a cross-sectional augmented autoregressive distributive lag model (CS-ARDL).

Findings

Under regulations avoidance theory, the findings revealed that WMPs and deposits have a stable long-run substitute relationship. Furthermore, the WMP–Deposit substitute relationship was only significant and consistent for SMBs, but not for large four banks. The findings further revealed that the WMP–Deposit substitute relationship existed, even after the removal of the deposit rate limit imposed by the People's Bank of China (PBOC) to control the deposit rates.

Research limitations/implications

The individual bank-issued WMPs' amount data is not available in any database. Therefore, this study utilized the number of WMPs as a proxy for China's banking sector's exposure to the wealth management business.

Practical implications

This research helps policymakers to understand the Deposit–WMP relationship from the off-balance-sheet perspective. During the various stages of interest rate liberalization, banks were given more control to establish their deposit and loan interest rates. However, the deposit rates are still way below the WMP returns, making WMPs more competitive. This research suggests that policymakers should formulate a more balanced strategy regarding deposit rates and WMPs returns.

Originality/value

This study contributes to the existing literature on China's shadow banking by concentrating on the WMPs. This research represents one of the few studies that analyze regulatory arbitrage in terms of the WMP–Deposit relationship. Moreover, the implementation of CS-ARDL panel data models and multiple data sources makes this study's findings more reliable and significant.

Details

International Journal of Bank Marketing, vol. 40 no. 1
Type: Research Article
ISSN: 0265-2323

Keywords

Abstract

Details

Central Bank Policy: Theory and Practice
Type: Book
ISBN: 978-1-78973-751-6

Article
Publication date: 4 July 2011

Roseline N. Misati, Esman M. Nyamongo and Anne W. Kamau

This study aims to quantitatively measure the size and speed of monetary policy interest rate transmission to long‐term interest rates in Kenya.

1535

Abstract

Purpose

This study aims to quantitatively measure the size and speed of monetary policy interest rate transmission to long‐term interest rates in Kenya.

Design/methodology/approach

The study uses autoregressive distributed lag specification re‐parameterized as an error correction model and mean adjustment lag methods.

Findings

The study finds incomplete pass‐through of policy rates both in the short and the long run. The study also shows that it takes approximately between 11 months to two years for policy interest rate to be fully transmitted to long‐term rates.

Originality/value

The study is novel as it is the first attempt the authors are aware of that empirically investigates the interest rate pass‐through in Kenya using high‐frequency data. Measuring the speed and size of interest rate pass‐through provides policy makers with insights on how long it takes for a particular policy action to yield desired results on the real economy. The findings of this study will therefore inform policy makers of the effectiveness of their policy decisions and facilitate timely monetary policy actions.

Details

International Journal of Development Issues, vol. 10 no. 2
Type: Research Article
ISSN: 1446-8956

Keywords

Article
Publication date: 4 October 2017

Serkan Yuksel

This paper aims to shed light on the risk structure in the presence of Islamic banking. The author concentrates on the relationship between Islamic banking and conventional…

Abstract

Purpose

This paper aims to shed light on the risk structure in the presence of Islamic banking. The author concentrates on the relationship between Islamic banking and conventional banking in Turkey. Islamic banking and conventional banking are considered to be different kinds of sources for funding. Returns in the conventional banking are expected to be heavily influenced by the interest rate in the money market. However, Islamic banking returns are interest-free so that interest rate changes are not expected to affect the deposit returns in Islamic banks. Interest rates in the economy are a proxy to highlight the general risk level of the economy. By looking at the causal relationship between the deposit returns of both Islamic banks and conventional banks, it is possible to address the different types of banking in the general risk structure of the economy. This is one of the first studies to address the mentioned difference in banking sector in Turkish economy.

Design/methodology/approach

This paper tries to identify the direction of causality between Islamic and conventional banking term deposit rates by means of Granger Causality. Also, Granger Causality test results will guide to explore the Islamic and conventional banking deposit return linkages. The author has extended the study with vector autoregressive analysis to understand the correlation structure between conventional deposit rates and the profit–loss sharing ratio of Islamic Banks. The author has also extended this study with impulse response functions to see whether the shocks hitting into the conventional banking affect Islamic banking and vice versa.

Findings

The results suggest that there is no significant clear relationship between both banking sectors. This result can be interpreted, as Islamic banks do not adjust their profit–loss sharing (PLS) ratios pegged to the interest rate offered by conventional banks. Also, conventional banks determine their interest rate without any connection to the Islamic banking PLS ratios. Overall results of this study contradict the findings of studies which conclude that Islamic banking might not be different from the conventional banking. It is reported that inferences from pair-wise Granger causality alone might be spurious, as the analysis based on non-stationary series can be a consequence of time functional characteristics of the time series.

Social implications

The results can be taken as counter evidence to the hypothesis “Islamic banks determine their PLS ratios based on the interest rates offered by conventional banks”. This address that the Islamic banks may offer alternative financing methodology which has different procedure. Hence, Islamic finance can be taken as an alternative method with its asset-based healthier structure.

Originality/value

This is one of the first studies to address the Islamic versus interest-based banking difference in banking sector in Turkish economy. This paper tries to identify the direction of causality between Islamic and conventional banking term deposit rates by means of Granger causality.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 10 no. 4
Type: Research Article
ISSN: 1753-8394

Keywords

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